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Of Prime Interest: Qualifying for a mortgage with a bankruptcy history

Is it possible to successfully obtain a mortgage after having declared bankruptcy in your past?

Many Canadians find themselves bogged down with a poor credit rating resulting from situations out of their control—illness, losing a job, or simply not understanding how to handle their credit.

Unsatisfactory financial situations can happen to good people and bankruptcy is sometimes the only way out.

We can offer some tips to assist in repairing one’s credit and to eventually be approved for a mortgage even after bankruptcy.

It can be very frustrating being successful with a mortgage application after bankruptcy.

Some lenders will not approve a mortgage if a bankruptcy shows up on a credit report.

Many lenders have different criteria regarding the length of time since a bankruptcy after which they will approve a mortgage—typically two years along with proof of re-established credit is the benchmark.

A bankruptcy will remain on your credit bureau for up to seven years. A private or “B” lender will consider approving a client with a more recent bankruptcy provided the borrower can demonstrate they are now a good credit risk, post a decent down payment and generate suffucient income to qualify for the payments.

The reasons for a bankruptcy declaration are important to a lender.

If it was due to factors beyond your control that is more acceptable to the lender than if it were the result of excessive debt and poor money management.

Typically a 10 per cent mortgage down payment is required in these situations, although a five per cent down payment is sometimes acceptable.

The down payment must come from one’s own resources and not be gifted. Depending on the time elapsed since the bankruptcy, some lenders will also charge a higher interest rate and in some cases a fee.

A lender will grant a more favourable rate if certain lending criteria have been met such as two years since the bankruptcy has been discharged—good re-established credit, minimum beacon score, saved down payment, good debt servicing ratios and good job stability.

Re-established credit is most important of those factors as it demonstrates to the lender that a prospective borrower has new credit and has managed it as agreed since the bankruptcy.

Typically a lender will look for two lines of well established credit for two years. A missed payment during this stage could very well be grounds for the mortgage application to be declined.

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